Below is a list of terms related to real estate auctions. If you want to learn more real estate investing terms click here: Important Real Estate Investing Terms Defined
Auction Terminology to Know:
Absolute Auction
No matter what the price, the property is sold to the highest bidder.
As-Is
The property is being offered in its current state and no repairs will be made. However, there can be some exceptions to this if you are purchasing a REO property from a bank, since some banks will make repairs in some instances.
Bargain and Sale Deed
A bargain and sale deed is similar to a quitclaim deed in that it conveys the grantor’s interest at the time of transfer. But it can also include convenants that make it more similar to a grant deed by guaranteeing that the grantor has the legal right to transfer the property.
This type of deed is often provided in the case of a transfer from a bank or estate representative, instead of someone who had lived in the property. It provides a guarantee that the grantor has the legal right to transfer the property, but does not provide any guarantee that the property is free of debts or liens. While a bargain and sale deed limits the seller’s liability, it does not protect the buyer from title claims, so title insurance should be purchased to protect the buyer.
Buyer’s Premium
A fee at auctions that is charged by the seller to cover the administrative expenses of conducting the auction. It is essentially just like a real estate commission for a property sale, but it’s typically in the form of a percentage of the winning bid. This fee must be taken into account when estimating costs for any purchase at an auction.
Code Enforcement or Administrative Lien
A property that is deteriorating or has a safety hazard may have a lien placed upon it for code violations until the property is brought to a condition that remedies the violations. Code violations can include such things as uncut grass, broken windows or open doors, cracked concrete steps, noxious fumes emanating from the property, or other issue that threaten the structure, such as missing gutters or siding. Even if someone else has dumped debris on your property, which happens often with vacant properties, you as the property owner are responsible. Often these violations are reported by neighbors who feel the property is a nuisance or hazard to the neighborhood.
Complaints are investigated by a code inspector who will give the property owner a period of time to correct the violation unless it is irreparable. If the violation is not corrected in the allotted timeframe or if it is a repeat violation, a hearing is held and the code-enforcement board issues findings of fact, an order, and a fine. This fine is recorded in public records by the local government, and becomes a lien against the property, as well as an other real or personal property owned by the violator.
If a property owner wishes to sell another property, this lien may affect that property as well, unless this second property is their primary home. If this lien is not repaid within a period of typically three months after recording, the local government may foreclose on the lien or sue for the amount of the lien plus interest. This type of lien can survive the issuance of a tax deed at a tax sale and the foreclosure process, so buyers must be arware of these liens when purchasing properties at auctions.
Deed of Trust
A deed of trust is a legal document that creates a lien, or security interest, against a property on behalf of a lender, and provides the borrower with equitable title to the property. (Until the borrower pays off their loan, they will have equitable title, meaning they have the right to use and enjoy the property, but they do not have legal title, or true ownership.)
While a mortgage is another legal document that accomplishes this, a deed of trust can be used in some states instead. Deed of trusts involve three parties instead of two, including the lender (beneficiary), the borrower (trustor), and a trustee, such as a title or escrow company, who holds the property’s legal title but is not representative of either the lender or the borrower.
The trustee has the legal right to sell the. Property if the borrower defaults on the loan. Having a deed of trust instead of a mortgage document also affects the way that foreclosures are handled. In states where deed of trusts are used, lenders can foreclose using specific procedural steps without having to go to court (non-judicial foreclosure). Both mortgages and deed of trusts place liens on the property used to secure the loan, but mortgages typically take longer and cost more to foreclose on a lender in default. For this reason, lenders may opt to use deeds of trust in states that allow this practice.
Equitable Title
Until a borrower pays off their loan, they will have equitable title, meaning they have the right to use and enjoy the property, but they do not have legal title, or true and absolute ownership. When a borrower completes the final installment payment of the loan, they have the right to demand that legal title be transferred to them. Other instances of equitable title may involve an easement on the land, such as if a property owner needs access to a driveway on someone else’s property to access their property, or a lease on the premises that already exists when the property ownership changes hands, or certain types of licenses.
When a different party has equitable title to a property but not legal title, the party with legal title does not have the right to use and enjoy the property. For example, when a person takes out a mortgage, the bank that issued that mortgage cannot use and enjoy their property but the borrower who has equitable title can. There are many other scenarios where the legal and equitable title may be held by different entities, such as with air rights, farming rights, water rights, utility line easements, and more.
Foreclosure
Foreclosure is a legal process undertaken by a lender to take possession of a mortgaged property in order to sell it to recoup the amount owed by the borrower who has defaulted on a loan.
Foreclosure Auction
Lenders sell properties they have repossessed for non-payment of loans without the involvement of a court. These auctions can be public or private. While foreclosure sales directly from a bank or other database may allow for inspections, when foreclosure are offered at auctions they typically do not, although in some cases they may offer an open house or virtual tour.
Judicial Foreclosure
This method of foreclosure requires legal action on the part of the lender after a mortgage lien is placed on a property. The lender must file a lawsuit and obtain a judgement in court for the foreclosure to proceed.
No Inclusions
You may see this term on a bank contract saying that there are no inclusions with the home. This refers to items such as refrigerators or other appliances. This may be the official policy, but it’s unlikely the bank will remove any of these items that are in the house before closing.
Non-Judicial Foreclosure
This method of foreclosure is used in states that use deed of trusts instead of mortgages, and allows a lender to foreclose using a specific procedure without needing a judgement from a court. This is allowed because a deed of trust is an agreement that allows a third party trustee the right to sell a property if the loan payments are not made.
Non-Performing Note
When a borrower has not made a payment on their property loan in 90 days, and therefore the borrower is in default.
Pre-Foreclosure
Pre-foreclosure is a formal notification by a lender to a borrower that they may soon face foreclosure on a property loan if they have not kept up with their loan payments. This notice typically is given by a lender after three months of missed loan payments. Pre-foreclosure provides the borrower one last opportunity to negotiate with the lender and bring their payments up to date. A lien is placed on the property, and the lender can file a legal complaint with the local county government.
You will often see pre-foreclosures listed on websites advertising properties for sale, such as Zillow or bank inventory websites. These are properties whose owners are behind on payments for their mortgage, but many of these properties will not be available for sale because they will never reach the foreclosure stage due to borrowers catching up on payments or modifying their loan terms, or a sale of the home before a foreclosure occurs.
Learn more about pre-foreclosure in this article:
What is Pre-Foreclosure and How Does it Work?
REO
REOs are properties that banks have already taken ownership of after a foreclosure. Typically the bank uses a management company to maintain the property minimally until it can be sold. The former homeowners may not have been able or willing to maintain them before the foreclosure, and since process of foreclosure and subsequent sale of the property can take a long time, these properties are often in disrepair.
Because of this, banks list these properties “as is” and typically will not make any repairs before a sale. These types of properties are a favorite of flippers who purchase them at a low price to renovate them and sell them for a profit.
Sheriff’s Sale
A public auction where foreclosed properties local to the county are auctioned off. Depending on the laws of the state where a foreclosure occurs, the sale of a property foreclosure may be overseen by the county sheriff at a Sheriff’s Sale instead of by the lender or lender’s trustee. Sheriff Sales can also be held for properties that have judgement liens against them for outstanding debts including tax liens for unpaid property taxes.
Short Sale
When a pre-foreclosure property is sold before foreclosure happens this is often called a short sale. Although this type of sale can occur between private parties, the lender typically has to approve the sale before it can go through. The reason this type of sale is called a “short sale” is that the buyer may be purchasing the property for less than the outstanding loan balance. Short sales do not happen at auctions.
Not all short sales are pre-foreclosures however, because they are often sold before they reach that stage. Investors can often purchase properties for less than fair market value (FMV) in these scenarios and turn them around quickly for a profit. The reason a property owner may wish to sell their home or other property for less than the balance on their loan to avoid having a foreclosure on their credit history. (Although it’s important to note that even one missed mortgage payment has a significantly negative impact on a person’s credit score.)
For homeowners, this means they could still buy a more affordable home after the sale. Therefore short sales are often a good deal for all involved, including the lending institution because they avoid foreclosure costs, carrying costs, and closing costs. However, the purchase price will likely be more than it would be if the home had already been foreclosed.
Special Warranty Deed (Also Referred to as a Covenant Deed, Grant Deed, Limited Warranty Deed, or Statutory Warranty Deed)
A special warranty deed only makes guarantees about the title regarding the time the seller (or grantor) owned the property. The seller only warrants that the property has not been sold to another party, and that there are not taxes owed or other current liens that the seller has not disclosed. This means that any title claims that may be dated before the seller took possession are not covered, which this leaves a buyer open to potential problems. This type of deed is often used to transfer ownership at tax sales or foreclosure sales.
Tax Lien
This is a legal claim against property to secure an interest for the government because of a tax debt. A tax lien can be placed against personal property or real property. Federal tax liens result from nonpayment of federal taxes by any “person” as defined by law. A “person” in this context can be an individual, a trust, a legal partnership, an association, an estate, a corporation, or other types of companies.
Note that state law varies in terms of taxpayer rights in a property, and the federal government will determine taxpayer rights in accordance with the laws of the state where the property is located. This may come into play in cases of civil union, domestic partnerships, and other cases. Things can get complicated when a property is owned by multiple parties but only one party is named on the tax lien, as in the case of the spouse of a taxpayer.
Upset Bid Period
In states that allow upset bidding at property foreclosure auctions, bidding is extended beyond the auction date. Often this extended period of time is 10 days after the auction ends. Upset bids must be a specific amount or percent higher than the last bid (rules vary by state). This means no one can win with an upset bid that’s one dollar more than the winning bid at the auction.
Upset Price
The minimum dollar amount that the lender (or other plaintiff) will accept for a property. It could be a higher or lower amount than the judgement against the property. The property will not be sold at an auction if this amount is not met.
More real estate investing terms here:
Important Real Estate Investing Terms Defined